As part of its efforts to support capacity building and governance for sound development management, ADB continues expanding law and policy reform work promoting policies, legal reforms, and regulations supporting ADB's overarching goal of poverty reduction through economic growth; enhancing the status of women; and protecting the environment. Such work has focused on capacity building among institutions responsible for the administration and enforcement of laws and regulations, continuing legal education for government lawyers, working with front-line development ministries and with government enterprises, and fostering research into the relationships between economic development and legal and policy reforms.
In recent years, ADB has worked closely with its developing member countries (DMCs) in addressing legal and regulatory reforms considered necessary to foster sustainable development. In 1998, such legal and regulatory reforms became a central element in DMCs' responses to the Asian financial crisis and in ADB's assistance to those countries affected. Such crisis-related assistance complemented ADB's ongoing law and policy reform assistance in 23 DMCs.
ADB's assistance to DMCs affected by the 1997 Asian financial crisis in its earliest days focused on reforms to the legal and policy frameworks for regulation of financial institutions as well as financial and capital markets. Significant in this respect has been the work pioneered by ADB on insolvency and secured transactions law reforms as well as the need for a tandem approach to reforms in those two areas.
ADB's approach to legal and judicial reform focuses on institutional reform and capacity building. Increasingly, it recognizes that a systemic approach to legal and judicial reform is indispensible for optimal development impact. Attention to systemic issues such as incentives, organizational structure, accountability and transparency can lay the foundation for sustainable legal and judicial reform.
In the context of poverty reduction ADB's law and policy reform focuses on issues relating to links between poverty, vulnerability, livelihood, governance, and access to justice. As part of this ADB has focused legal empowerment as a tool to ensure that the poor access the legal entitlements guaranteed to them under the law.
ADB continues to play a leading role in fostering interchanges in the field of law and policy reform among its DMCs, funding agencies, academics, and other interested parties. LAW-DEV, the ADB-sponsored Internet forum, provides a daily link for communicating ideas and information among more than 600 participants in 40 countries. ADB's Law and Policy Reform Bulletin, and Law and Development: An Asian Bibliography are important sources of information about DMC law reform activities and funding agency technical assistance in the field. The Role of Law represents a major contribution to the academic literature on law and development.
Project DIAL (Development of the Internet for Asian Law) is a pioneering project that makes available to DMC law reform personnel and legal drafters full text legislative material from more than 40 countries as a virtual reference library. This project is larger than any physical legislative library in the Asian and Pacific region.
(See also Office of the General Counsel; Good Governance; and Governance and Capacity Building)
ADB provides loans for different purposes such as
project loans to finance specific projects;
program loans to support the effort of developing member countries (DMCs) in improving the policy, institutional, and investment environment of sector development and to help meet short-term costs that policy adjustments entail; and
sector loans to develop a specific sector or subsector and finance many subprojects in a single sector or subsector.
Borrowing Countries
ADB assists all its DMCs and gives special regard to the needs of the smaller or less-developed countries of the region. ADB has made loans to such less-developed countries, which, in several cases, were their first loans from an international banking institution. But in these DMCs, bankable projects can generally be identified and formulated only by providing technical assistance, which takes more time and effort.
ADB's concessional lending started later than its ordinary operations. Special funds are in short supply, and ADB's concessional lending activities have, therefore, been limited. ADB has no problem in providing ordinary loans to the smaller or less-developed countries as long as they can afford the burden involved. The Charter underscores the desirability of avoiding a disproportionate amount of ADB's resources being used for the benefit of any single member. Therefore, ADB consistently tries to bring about a more even spread of assistance and to step up its lending to the smaller or less-developed countries through greater assistance in identifying and preparing projects.
Eligibility
ADB may make, or participate in, direct loans to governments of its DMCs, to any of their agencies or political subdivisions, public and private entities and enterprises operating within such DMCs, and international or regional agencies concerned with economic development in the region. ADB does not, however, finance any undertaking in the territory of a member if the member objects to such financing.
Governments
ADB's policy for lending to governments is based on each member's special situation—its economy, access to other funds, needs, priorities, and national development plans.
Loan Products
Currently, ADB has four lending windows for loans from its ordinary capital resources (OCR):
a pool-based multicurrency loan window where loan disbursements are made in a variety of currencies of ADB's choice;
a pool-based currency-specific loan window in US dollars, which ADB commenced in July 1992;
a market-based loan (MBL) window, which was established in December 1994; and
a London interbank offered rate (LIBOR)-based loan (LBL) window, which became effective 1 July 2001.
The pool-based multicurrency loan window was adopted by ADB on 1 July 1986. At the borrower's option, it was also available to those approved after 24 September 1985. Lending rate applicable to this lending window is determined by adding a spread to the average cost of a pool of outstanding borrowings settled on or after 1 July 1986 and is adjusted every six months, on 1 January and 1 July of each year. Currently, the lending spread is set at 0.6 percent per annum. With the adoption of the LBL window, effective 1 July 2001, this lending window will no longer be offered to borrowers.
For the currency-specific US dollar public sector loans, lending rate is determined by adding the same spread to the average cost of pool of outstanding dollar borrowings settled after 1 July 1992 and is adjusted every six months on 1 January and 1 July each year. With the adoption of LBL, this lending window in US dollar will be retired on 1 July 2002. LBL terms are also extended to borrowers who wish to convert the undisbursed amounts of their presently effective pool-based single currency loan in US dollars, if the amount is at least 40 percent of the original loan amount. Invitation to negotiate will be issued on or after 1 January 2002.
The MBL window was established to provide single currency loans in US dollars, Japanese yen, or Swiss francs to private and government-guaranteed financial intermediary borrowers at current terms prevailing in international financial markets. With the effectivity of the LBL window, the MBL window will no longer be offered effective 1 July 2001.
The LIBOR-based loan window is offered to public and private sector borrowers. It carries a floating lending rate that consists of six-month LIBOR and a spread fixed over the life of the loan. For public sector borrowers, the current lending spread of ADB is 60 basis points. For private sector loans, the fixed spread will reflect the credit risks of the specific project and borrower. This lending window offer a high degree of flexibility to borrowers namely (i) choice of currency and interest rate basis; (ii) options to link repayment schedules to actual disbursements for financial intermediary borrowers; (iii) change in the original loan terms (currency and interest rate basis) any time during the life of the loans; and (iv) options to cap or collar the floating lending rate at any time during the life of the loans.
Thus as of 1 July 2002, ADB's loan product menu will consist only of LBL.
For public sector loan, ADB charges a front-end fee of 1 percent of the loan amount. Borrowers are given the option to capitalize the fee. For private sector, under the LBL terms, a front-end fee of 1–5 % of the loan, or less if overall project return justifies it.
For public sector loans, ADB charges based on undisbursed loan amount a progressive commitment fee of 0.75 percent for project loans and a flat commitment fee of 0.75 percent for program loans. For private sector, ADB charges a commitment fee of 0.5–1.0 percent.
Loan-Loss Provisioning Policy
Where there are doubts about the ultimate collectibility of the principal of a loan, the following provisioning policies will apply.
In the case of public sector loans from the OCR specific loan-loss provisions will be initiated after payment obligations to ADB for a borrower's interest or principal that is in arrears to ADB for one year, unless there is clear and convincing evidence warranting the deferment or acceleration of such provisioning. In April 2000, the Board of Directors approved the elimination of the Asian Development Fund loan-loss provisioning.
ADB will continue to make specific loan-loss provisions for private sector loans and equity investments as determined by Management after quarterly reviews of projects in ADB's portfolio.
For the remainder of the private sector portfolio not covered under specific provisions, ADB will make general loan-loss provisions at a rate to be determined by the Board of Directors.
The amount of provisioning to be charged against ADB's current OCR income each year, for both public and private sector loans and equity investments, will be reviewed and approved by the Board of Directors.
Modalities
Most ADB financing is designed to support specific projects, but ADB also provides other lending modalities such as technical assistance loans; credit lines; program, sector, sector development program, and private sector loans.
(See also Program Lending; and Sector Lending)
Nonaccrual Policy
ADB has not suffered any losses to date on loans made to or guaranteed by members, and follows a policy of not taking part in debt-rescheduling agreements. It is the policy of ADB to place in nonaccrual status all loans in which principal, interest, or other charges are overdue by six months. Interest and other charges on nonaccruing loans are included in income only to the extent that ADB has actually received payments.
Policies
Loans are made for projects with high development priority. ADB provides financing to its borrowers to cover foreign exchange expenditures incurred on a project and also finances local currency expenditures in certain cases. Loans from the OCR are denominated in US dollars but are disbursed in a variety of currencies. ADB requires its borrowers to absorb exchange risks caused by fluctuations in the value of the currencies which it has disbursed. ADB's borrowers share the exchange risk on loans through ADB's Exchange Risk Pooling System. As a general rule, the less-developed ADB members borrow from the ADF, ADB's Special Fund for financing loans on concessional terms, while members with stronger economies borrow from the OCR.
Procedures
Only projects of high national priority and with the support of the DMC concerned are considered by ADB for public sector operations. Requests are, therefore, normally made through the government concerned. Prospective borrowers usually address preliminary inquiries to ADB. When ADB receives an inquiry, it decides what additional information, if any, is required.
Relationship with Subscribed Capital
Under ADB's Charter, the total amount outstanding of loan commitments from the OCR, and equity investments and guarantees made by ADB, may not at any time exceed the total amount of its unimpaired subscribed capital, reserves, and surplus included in its OCR. This gearing restriction of a one-to-one ratio of loans to capital is more conservative than that of a typical commercial
bank.
Repayment of Loans
In making a loan, ADB pays due regard to the capability of the borrower and its guarantor, if any, to meet the obligations under the loan agreement. Sound banking principles also guide ADB in its operations.
Sectors
ADB loans are provided for projects in the following sectors: agriculture and natural resources, energy, industry and nonfuel minerals, financial, transport and communications, social infrastructure (water supply and sanitation, urban development and housing, education, and health and population), and multisector. This listing does not, however, preclude ADB from responding to proposals in other sectors that conform to its purpose and fall within its functions.
ADB's DMCs comprise a heterogeneous group of countries with different needs and in varying stages of development. ADB, therefore, adopts a flexible policy.
Terms and Conditions
In the case of direct loans, the loan agreement sets out the terms and conditions of the loan, including those relating to payment of principal, interest, and other charges, maturities, and dates of repayment. Interest charged by ADB on loans from the OCR and the service charge on loans from Special Funds are computed on the outstanding amount of the loan. ADB also levies a commitment charge on loans made from the OCR.
The borrower is normally permitted to draw on the loan only to meet expenditures as they are actually incurred in connection with the project. In the interest of economy and efficiency, ADB generally requires that borrowers seek competitive bids from potential suppliers in ADB members; engineering plans and specifications are drawn up independently of the suppliers; and, if appropriate, borrowers retain independent consulting engineers.
Except as otherwise determined by the Board of Directors, ADB requires that the proceeds of loans or other financing by ADB be used only for procurement in ADB members of goods and services produced in members.
Types of Loans, by Source
ADB provides two kinds of loans—from the OCR and from the ADF. OCR loans are provided to DMCs with somewhat higher levels of economic development, and ADF loans on highly concessional terms are provided to DMCs with low average per capita incomes and limited debt-repayment capacity.
For pool-based multi-currency and currency specific US dollar, ADB's lending rate is determined every six months and depends on ADB's cost of borrowing funds plus a spread. The repayment period varies from 10 to 30 years, including a grace period of 2–7 years. For LBL, ADB's lending rate is based on six-month LIBOR plus a spread.
ADB provides loans in US dollar, Japanese yen, or Euro.
On 14 December 1998, the Board of Directors approved amended loan terms for the ADF. The amended terms are for new loans to all ADF borrowers, effective 1 January 1999.
For project loans (other than quick-disbursing program loans): 32-year maturity including an 8-year grace period, 1 percent interest charge during the grace period, and 1.5 percent during the amortization period, and equal amortization.
For quick-disbursing program loans: 24-year maturity including an 8-year grace period, 1 percent interest charge during the grace period, and 1.5 percent during the amortization period, and equal amortization.
The resources for these loans mainly consist of contributions mobilized under periodic replenishments from members. A resolution of the Board of Governors authorizes the replenishments.
The floating interest rates for private sector loans are mostly based on rates offered by prime banks in the London Interbank market plus a suitable spread.
Utilization
A loan approval by ADB does not mean that the amount of the loan is immediately transferred to the borrower in a lumpsum. Instead, a loan account is opened in ADB's book in the name of the borrower and the loan amount is credited to that account when the loan becomes effective. The withdrawal from the account is approved to meet expenditures authorized under the loan agreement, as and when the borrower incurs such expenditures.
(See also Borrowings; Cofinancing; Credit Line; Financial Resources; Operations Evaluation; and Policy Dialogue)
ADB's policy is to maintain liquid assets amounting to at least 40 percent of total undisbursed balances of approved loans at the end of each year. The main purpose of the liquidity policy is to ensure the uninterrupted availability of funds to meet loan disbursements, debt servicing, and other expenditures. The liquidity portfolio functions as a buffer on ADB's balance sheet by providing protection against unexpected adverse cash flow situations such as accelerated disbursements and a shortfall in the borrowing program that could arise as a result of a major borrower defaulting on its loans from ADB. In addition to serving this primary objective, the liquidity portfolio contributes to ADB's earning base.
The investment of liquid assets is governed by the Investment Authority approved by ADB's Board of Directors and by Investment Guidelines approved by the President. The main objective is to maintain security and liquidity. Subject to these constraints, ADB follows investment practices designed to maximize total return on investments.
Under the Investment Authority, ADB may purchase and sell bonds, which are
issued or guaranteed by the member country whose currency is involved in the investment;
issued or guaranteed by an eligible nonborrowing member country and denominated in a convertible currency;
issued or guaranteed by an eligible government agency;
issued or guaranteed by an eligible multilateral organization;
issued or guaranteed by eligible corporate entities, or consist of eligible asset-backed and mortgage-backed securities; or
consist of time deposits and other obligations of eligible banks.
In addition, ADB may purchase and sell financial futures and option contracts; enter into currency exchange agreements, interest exchange agreements, and forward rate agreements; and lend, against adequate collateral, and borrow securities.
Investments in mortgage-backed securities (MBS), asset-backed securities (ABS), and corporate bonds are limited to the US dollar portfolio only. The portfolio allocations to MBS, ABS, and A-rated corporates are managed by external asset managers.
The average portfolio duration must range between zero and 36 months. The major currency portfolios are managed against external benchmarks with a duration ranging between two and three years.
It is not permitted to change the currency composition of the portfolio as part of the liquidity management. Liquid investments are presently held in 18 different currencies.
(See also Borrowings; Creditworthiness; Financial Management; Ordinary Capital Resources; and Treasury Department)
The Asian Development Bank's new long-term strategic framework (LTSF) will help the developing nations of Asia and the Pacific eradicate extreme poverty by 2015. The strategy is embodied in a new document, Moving the Poverty Reduction Agenda Forward in Asia and the Pacific, which spells out ADB's plans and priorities.
The new strategy is a major reassessment of ADB's goals and policies that in 1999 resulted in the announcement that extreme poverty for one in four Asians was an unacceptable human condition, and that poverty reduction would be the overarching goal of all ADB activities. The LTSF sets out an agenda for carrying out the poverty reduction strategy in the next 15 years.
To enhance its effectiveness and to remain relevant to the changing needs of the region, ADB has continually been adapting its priorities, assistance modalities, and organizational structure. ADB first reoriented its operational priorities in the early 1980s. This was followed by a change in the 1990s that resulted in more emphasis on social infrastructure, projects targeted at the poor, and projects to improve the environment.
ADB has integrated its LTSF with the International Development Goals, seven broad benchmarks for reducing poverty worldwide by 2015 that were agreed upon at a series of United Nations-sponsored world conferences during the past decade.
The International Development Goals are to
reduce the incidence of extreme poverty by half between 1990 and 2015,
achieve 100 percent primary school enrollment by 2015,
eliminate gender disparities in primary and secondary education by 2005,
reduce infant and child mortality by two thirds between 1990 and 2015,
reduce maternal mortality ratios by three quarters between 1990 and 2015,
expand access to reproductive health services to all women by 2015, and
implement in all countries a national
sustainable development strategy by 2005 and to reverse the loss of environmental resources by 2015.
ADB's agenda for advancing the poverty reduction strategy recognizes three core areas of intervention:
sustainable economic growth: broad-based, growth-promoting activities that promote socially and environmentally responsible development;
inclusive social development: investments in programs for social support and for equity and empowerment, especially for women and disadvantaged groups; and
governance for effective policies and institutions: support for public sector management, legal and judicial reform, public accountability, and procedures to give stakeholders more effective participation in decision making.
These three core areas are complemented by three crosscutting themes to broaden and deepen the impact of the core poverty reduction interventions:
promoting the role of the private sector in development in consonance with the private sector development strategy adopted by ADB in 2000, including the mobilization of private sector resources to address the challenges of development;
supporting regional cooperation and integration for development to provide wider development options, address shared problems, and pool information; and
addressing environmental sustainability by putting environmental considerations in the forefront of development planning and reversing the enormous and costly environmental degradation and damage that have already occurred.
The LTSF reflects ADB's position as the only multilateral development bank in Asia and the Pacific with a regional focus, and will emphasize ADB's role as a broad-based development institution. Greater selectivity in operations will be accompanied by a much stronger country and client focus, which will be achieved through stronger country leadership and ownership of the development agenda.
(See also Poverty Reduction Strategy; Strategic Agenda; and Strategic Planning)
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